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International Management Journals

www.managementjournals.com

www.managementjournals.com

International Journal of Applied Operations ManagmentVolume 1 Issue 1

Dimensions of Global Operations Strategy In Service Business:A Value-Chain-Based Analysis

Eisenhower C. Etienne, PhD.

ISSN 1744-8182

Associate Professor School of Business and Industry,

Florida A&M University

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International Journal of Applied Operations Management: Volume 1 Issue 1

The Nature of Global Industries

The classical frameworks for defining global industries and for outlining the keycharacteristics and determinants of global platforms comes from Porter (1986).

According to him, The pattern of international competition differs markedly fromindustry to industry. Industries vary along a spectrum from multidomestic to global intheir competitive scope. Multi domestic industries possess the followingcharacteristics;

1. Competition in each country or small group of countries exerts very littleinfluence on competition in other countries.

2. The industry is present in many countries but competition occurs on acountry-by-country basis.

3. In a multidomestic industry, a multinational firm may enjoy a competitiveadvantage from the one-time transfer of know-how from its home base toforeign countries. However, the firm modifies and adapts its intangible assetsin order to employ them in each country, and the competitive outcome overtime is then determined by conditions in each country.

4. The competitive advantage of the firm is largely specific to the country5. The international industry becomes a collection of essentially domestic

industries

According to Porter, The definition of a global industry employed here is an industryin which a firms competitive position in one country is significantly affected by itsposition in other countries and vice versa. Therefore, the international industry is notmerely a collection of domestic industries but a series of linked domestic industries inwhich the rivals compete against each other on a truly worldwide basis. Industriesexhibiting or evolving toward the global pattern today include commercial aircraft, TVsets, semiconductors, copiers, automobiles and watches.

Global industries have characteristics that are opposite to those of multidomesticones, and the following are some of these characteristics;

1. Competitive forces exert their influence on a global basis. The intensity ofcompetition in one national market is a projection of rivalry in othermarkets.

2. The industry exists on a global basis although production is usuallyconcentrated in a large enough number of international production centersthat have also become global platforms and/or favorable manufacturing

locations for the industry. The existence of a sufficient number of these globalplatforms is what makes the global industry extremely competitive.3. Distinct domestic industries as such do not exist. The boundaries of national

markets are permeable and countries may be simultaneously high exportersand high importers of the product.

4. The competitive advantage of the firm is determined by the interaction of acomplex array of factors whose influences extend well beyond the borders ofa nation.

5. The international industry is a set of highly integrated domestic industriesthat have essentially lost their individual domestic characters.

The classical global industries are in manufacturing. However, Porter did point out

that service industries were evolving towards greater globalization; Homogenizationof product needs among countries appears to be continuing, though segmentation

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within countries is as well. As a result, consumer packaged goods are becomingincreasingly prone towards globalization, though they have long been characterizedby multidomestic competition. There are also signs of globalization in some serviceindustries as the introduction of information technology creates scale economies insupport activities and facilitate coordination in primary activities. Global service firmsare reaping advantages in hardware and software development as well asprocurement.

The Competitive Strategy Implications of Multidomestic andGlobal Industries

According to Porter, In a multidomestic industry, competing internationally isdiscretionary. A firm can choose to remain domestic or can expand internationally, ifit has some advantage that allows it to overcome the extra costs of entering andcompeting in foreign markets. The important competitors in multidomestic industrieswill either be domestic companies or multinationals with stand-alone operationsabroad. In a multidomestic industry, then, international strategy collapses to a seriesof domestic strategies. The implications of this thesis for our present purposes arequite profound. Service industries are generally of the multidomestic type.Consequently, the classical conceptualization leads us to expect that service firmsthat are competing internationally would not be deploying true global strategies, but aset of domestic strategies deployed by their respective country units. Theinternational firm in these service industries would be managing a portfolio ofbusinesses instead of being true global corporation.

The strategic options available to the firm change rather fundamentally when weconsider the case of the global industry. Porter (1986) observes; In a global industry,

managing international activities like a portfolio will undermine the possibility ofachieving competitive advantage. In a global industry, a firm must, in some wayintegrate its activities on a worldwide basis to capture the linkages among countries.This integration will require more than transferring intangible assets, though it willinclude such transfer. A firm may choose to compete with a country-centeredstrategy, focusing on specific market segments or countries where it can carve out aniche by responding to whatever local country differences are present. However, itdoes so at some considerable peril from competitors with global strategies. All theimportant competitors in the global industries listed above compete worldwide withincreasingly coordinated strategies.

The viable strategic options open to a firm depends on the extent of the globalization

of its industry. Firms competing in multidomestic industries are constrained to deploymultidomestic strategies that manage a portfolio of businesses, while thosecompeting in global industries, although they can choose to deploy multidomesticstrategies, would be at a considerable competitive disadvantage if they do so. Theinescapable conclusion is that in a global industry, the firm must deploy some sort ofglobal strategy.


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The Value Chain and Global Operations Strategy

A firm can be viewed as performing a set of value activities that create and delivervalue to the customer and which generate margins, as in Figure 1. The definition of

global operations strategies considers both how the firm configures these activitiesacross its national or geographic units, what is referred to as configuration, and howintensely these units are coordinated from a central location, the firms home-base orglobal platform. Configuration options range from concentrating the performance ofall value activities in the firms home base to dispersing across many geographiclocations. Where a company chooses to concentrate the performance of value chainactivities, it serves all geographic regions from its home base and performs in eachnational market only the downstream activities that are necessary to maintain itsmarket presence. These requisite minimum downstream activities usually involve theoperation of sales office and the establishment of an after-sales service operation.Where the company chooses to disperse the performance of the value chainactivities, it can, at the outrance, perform all the value chain activities in each countrythat it competes in, fundamentally treating the global industry as a set ofmultidomestic industries.

The second dimension of global strategy is coordination or the extent to which thestrategic and operations decisions related to like or linked activities in one countryare related to those of other countries and vice versa. Coordination means that theactions taken with respect to a value activity in one country are related to the actionstaken with respect to that value activity and all other value activities in all othercountries. Where there is little or no coordination, the country units are managed as aset of largely autonomous domestic subsidiaries, while high coordination usuallymeans that country units lose much of their strategic and, in some cases, operatingautonomy. The firms value chain configuration, its relative concentration ordispersion across national, that is, domestic industries, together with the degree ofcoordination among activities and national units give rise to its global strategy. Therange of global strategies is shown in Figure 2.

Activity concentration and the tightness of coordination of domestic units are drivenby different managerial considerations. The decision to concentrate the performanceof an activity in a particular geographical area is primarily based on the pursuit ofeconomies of scale and the perceived comparative (cost) and differentiationadvantage of the location where the activity is concentrated. The tightness ofcoordination of value chain activities or domestic units, on the other hand, is drivenby two factors. The first is the strength of the interrelationships among the activities in

the value chain. Coordination is the only mechanism through which management ofan enterprise can ensure that the strategically advantageous relationships amongactivities or organizational units are fully leveraged for competitive impact.Coordination may be pursued through a variety of means such as collaborativedecision-making in strategic, interphasal areas, the standardization and sharing ofinformation, the deployment of standardized and centralized control systems and ofcoordinators who serve as linking pins between related departments or units,committee and joint meetings, and, ultimately, the subordination of the units thatmust be coordinated under a common hierarchical authority. This latter mechanismhas been referred to in the management literature as administrative integration, and itmakes coordination an intra-organizational rather than an inter-organizational affair,increasing the potential to have high levels of coordination among the relevant units.


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Figure 1 : The Value Chain

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICELOGISTICS LOGISTICS AND SALES (After-sales)

M ARGIN

M ARGIN

Clearly, where the effective performance of a value activity or set of value activitiessubstantially influences the effectiveness of other activities, the related activities and

the units performing them must be coordinated, if the strategic relationships betweenthem are to be leveraged in any meaningful way. Thus, in a service business whoseservice delivery system is characterized by high levels of customer contact, there is avery strong strategic interrelationship between traditional marketing activitiesundertaken in the marketing function and the internal marketing activities performedthrough service execution in the service delivery system. For example, promotionalprograms designed by the marketing function to shape customer expectations of theservice can be completely nullified by discourteous and otherwise poor servicedelivered in the service delivery system. Therefore, the only way to leverage thestrategic relationship between these two functions and deliver consistently high levelsof service is to have tight coordination of the traditional marketing function, whereclassical marketing is managed, and operations, where internal marketing programs

are deployed. Such coordination is bound to be a critical success factor for a highcontact service delivery system and that is why high contact companies likeMcDonalds, Hilton Hotels and Club Med, to name but a few, deploy a variety ofstrategies to assure tight coordination of these highly interdependent functions.

The second factor driving the tightness of coordination is the degree to which thecompanys competitive strategy requires the creation and delivery of a standard orhighly similar service offering in all domestic markets. Where the company competesinternationally using the same service offering in all domestic markets, it mustmanage all domestic units with a high level of service delivery discipline. Otherwise,local deviations from the core service will adulterate the companys market imageand the service perception that it is trying to create in its customers through thefactual impact of the service delivery system. In order to achieve a very high level ofservice creation and delivery discipline, it is not enough that the companystandardize the service and delivery system design, but it must also assure that allunits are performing to that standard. Coordination through a centralized informationsystem, standardized and centralized corporate wide control system, andstandardized human resource training and development policies are essential to theachievement of such service delivery discipline. In other words, standardizationpromotes both concentration of activities and their coordination across servicecreation and delivery units, whether these units are involved in the performance ofprimary or support value chain activities.

The purest form of global strategy, the simple global strategy of Figure 2, involvesboth high concentration and tight coordination of activities. Concentration is done toachieve high economies of scale or to exploit the comparative advantage or the cost


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or differentiation advantage of a particular location, although concentration alsopromotes coordination. It is far easier to coordinate activities that are located in closeproximity than those that are geographically dispersed. So, when a companycompetes internationally, it increases the complexity of the coordination problemsand issues it must deal with and can only be successful in the global market if it canfind ways to assure tight coordination of performance of value chain activities and therelevant organizational units. A firm is deploying a global strategy if it seeks to gain acompetitive advantage by competing internationally either through the concentrationor dispersion of value activities across its national units, or through coordination ofthese units or through both concentration/dispersion and coordination.

Figure 2: Types of International Strategy and the Global Operations StrategyFrontier of Service Businesses

High Foreign SimpleInvestment with Global

Extensive Coordination Strategy Among Subsidiaries

IncreasingCoordination

and Concentration

The Global OperationsStrategy

Frontier for Service

Businesses

High

Coordinationof Activities

Low

Geographically GeographicallyDispersed Concentrated

Source: Adapted from Porter, 1986.

Global Operations Strategy Options for Service Businesses

Figure 2 gives us the conceptual base that we need to outline the innate global

strategy options available to service firms and to understand how astute servicemanagers have been able to position their companies to be effective globalcompetitors in their markets. Because services cannot be inventoried and usuallycannot be exported, the service delivery system usually must be local in scope. Theglobal strategies that require high geographic concentration of at least the coreservice delivery process or operations and those value chain activities such asinbound and outbound logistics that are strongly related to operations, are notavailable to most service firms, unless management deploys actions that have theconsequence of increasing the level of concentration. We can deduce from Portersframework that firms reap the greatest competitive advantage from both high levelsof concentration and tight coordination among domestic units. The coordinationproblem for many service firms is complex indeed, and this further restricts the ability

of service firms to deploy pure global strategies.


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The complexity of the coordination problem derives from three phenomena. First,most service corporations that compete internationally must manage a very largenumber of operating units in a large number of domestic (national) markets. Forexample, McDonalds has over 30,000 restaurants in at least 34 countries, whileFEDEX has thousands of service centers in over 200 countries, and the list goes onto include every service company with significant global operations. We refer to thisas proliferation of the service delivery process and it is driven by four factors: 1. Veryhigh outbound logistics costs or sheer incapacity to create the service in onecentralized location, or any location for that matter, and move it to a different locationwhere it is delivered and consumed, that is spatial in-transportability, and any servicethat is afflicted by it will experience proliferation of the service delivery process whenthe company globalizes; 2. Service tastes are highly influenced by localsocial/cultural nuances and idiosyncracies which force a company to adapt theservice offering, and sometimes even the service delivery process, to local tastesand behavior patterns in order to effectively compete in the global marketplace; 3. Allservice offerings have an element of psychological service which increases the levelof subjectivity in the specification of customer requirements, the evaluation of the

quality of the service on the part of the customer and overall satisfaction with thecompanys service. Moreover, these psychological service dimensions of the serviceoffering exacerbate the impact of local social/cultural influences on the specificationof the service package, the design of the service delivery process and the creationand delivery of the service to the customer.

The second phenomenon that increases the complexity of coordination for servicebusinesses is service value activity splintering. When compared with manufacturingindustries, the primary value activities of service businesses are often splintered inthat their performance is not the primary responsibility of any one function but of afew functions. For example, marketing activities in service businesses have aclassical, external marketing component which is in the ambit of responsibility of the

global marketing function. However, this primary value activity also has a rather verycritical internal marketing one for which the global platform of the corporation hasprimary responsibility and another critical local internal marketing component forwhich the domestic (local) organization has primary responsibility, the latter beingessentially lodged in the service delivery operation, under the purview of operations.

As a second example of splintering, take the example of airline companies where theprimary Operations value activities can be divided into reservations operations,typically under the direction of Marketing and Sales, and flight and ground operationsunder the direction of the Operations function. Splintering imposes more severecoordination requirements, since it introduces more distinct activity sets in the valuechain that are often the responsibility of different organizational units.

Because service tastes, wants, demand and consumption patterns are moresusceptible to local social -cultural influences, companies that want to competeinternationally must make peripheral adaptations to the core service to cater to localsocial and cultural idiosyncrasies. Some cases of adaptation of the service to localtastes by adding peripheral elements to a central core are shown in Figure 3. It mustbe emphasized, however, that these adaptations to local social-cultural influencesusually leave the core service intact, since the existence of a hard service corefacilitates increased coordination, a key factor in the ability of a service firm tocompete internationally.

Finally, due to the fact that the core elements of the service offering arefundamentally intangible or impalpable, they often cannot be specified with a highlevel of precision, and there are usually no physical measures of either the nature ofthe service or of performance of the service delivery system, which gives rise to non-


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evidentiality and the quality control problems it creates. The various elements of aservice concept are often fungible and performance evaluation has a very strongsubjective component. Consequently, in the absence of mechanisms to impose acorporate wide service discipline, deviation of the actual service from the intendedservice is easy and will most likely occur. In that case, local tastes, wants andconsumption idiosyncrasies are constantly tugging at the core of the service offeringto influence the company to redesign it to fit local wants, even if this wouldcompromise the integrity of the core service. The service company that wants tocompete internationally must build the organizational capability to maintain servicedesign and delivery discipline in the face of such parochial pressures from the localmarket. These service companies that are competing internationally must executethe service in a wide array of domestic markets, across a broad spectrum of cultures,and still maintain the strategic and service operations execution discipline that willmaintain the integrity of the service concepts and of the companys competitiveposition. This is one of the biggest management challenges for firms competinginternationally in a service industry, and the companies that succeed as globalcompetitors have built the organizational and strategic capability to effectively deal

with it. Standardization of the service offering and service delivery system buttressedby a tightly woven Social Software of Execution and its key component, the SocialOperating Mechanism (Bossidy and Charan, 2002), are quintessential to the creationof the requisite organizational and strategic capability to maintain integrity of theservice across national/domestic cultures, while simultaneously using the peripheralelements to make the service offering respond to the idiosyncratic needs driven bylocal cultures.

Figure 3: The Service Core and Adaptations to Local Social-Cultural Influences: TheCase of McDonalds

Peripheral Peripheral Service Service

Service

Hamburger, FrenchFries

Core Service

Coke, Sundae, Apple Pie

Curry Potato

Pie:Hong Kong

Teriyaki

McBurger:Japan

Soy Burgers;India

McBurrito; Mexico

Poutine;Quebec

These arguments mean that service firms have innately fewer global operationsstrategy options, a narrower range of attractive global operations strategies, and lesspotential to reap competitive advantage from globalization of operations than theirmanufacturing counterparts. We can envisage a frontier of innate global operationsstrategies for service businesses as shown in Figure 2, and it shows that the globalstrategy space innately available to service businesses is much more restricted thanthat available to manufacturing firms, the latter potentially occupying the entire globalstrategy space. For service businesses to become effective global competitors, theymust broaden the range of strategic options open to them by increasing their globaloperations strategy space. This can be achieved by designing and implementingactions that make it possible to have higher levels of concentration of the location of


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value chain activities, coupled with coordinating mechanisms or service design anddelivery strategies that make it economical to achieve tight coordination of bothdomestic units and the execution of value chain activities.

As shown in Figure 2, the actions that increase concentration and coordination pushthe global strategy frontier of service businesses upward and to the right, thusincreasing their global strategy space. Top managers in a few leading-edge servicebusinesses have been able to design and deploy effective global operationsstrategies that make their companies true global competitors. They do so bydeploying service design and delivery strategies that either allow them to increasethe level of concentration of value chain activities or create the potential to achievetight coordination of domestic organizations and service delivery units or both. Theselevels of concentration and coordination must be achievable over and above whatwould normally be realizable given the nature of the service in question.

The barriers to concentration are substantially physical. For example, because of theconcept of in-transportability introduced earlier, there is absolutely no way to deliver a

freshly prepared hamburger from Los Angeles to Tokyo, using current technology.The concentration enhancing actions that increase the capability of a service firm tocompete internationally will focus on reducing the physical barriers to delivering theoutput of the relevant activity set from where it is concentrated (produced) to where itis used. However, the barriers to coordination are also economic, since one cantheoretically coordinate any set of activities performed in one location with any otherset of activities performed in a different location, and this could be done by a varietyof mechanisms, as pointed out previously. In the case of coordination enhancingactions, what is at stake is the tightness of the coordination achieved and its cost. So,the actions that create the potential to achieve high levels of coordination will focuson dramatically reducing the cost of coordinating value activities and domestic unitsover a wide geographical area.

Pushing the Global Service Operations Strategy Front ier

We use the value chain in Figure 4 to outline the specific actions that many servicefirms have implemented that help them compete effectively internationally. Theseactions and the systems that support them are tough to configure and deploybecause they require the simultaneous achievement of standardization,differentiation, service system proliferation, activity concentration and integrationthrough coordination. Although it is a tall order for management of a modern servicebusiness, it is a strategic necessity to compete globally in a service industry, and the

highly successful service companies that we have already referred to have allsucceeded in achieving it. Figure 4 further bolsters the usefulness of the value chainconcept as a tool of operations strategy analysis and design. The value chainanalysis shows that despite the inherent disadvantages of services compared tomanufacturing when it comes to competing internationally, the level of concentrationof performance of value activities and their coordination across national organizationsand domestic markets can be increased significantly from a base level. Thisincrease in concentration and coordination has the effect of pushing the globalservice strategy frontier closer toward the simple global strategy option available tomanufacturing corporations. This can be achieved with clear global operationsstrategy intent by using the value chain, a strategic management framework, to mapout the actions that must be implemented in order to enhance concentration and

coordination mechanisms that are specific to each value activity.


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In one form or another, the actions outlined in Figure 4 involve the application of thefundamental concepts of management: Standardization, Concentration to achieveeconomies of scale, Differentiation and Integration through Coordination. We recallthat differentiation is the process of recognizing that different organizational units oractivities have different requirements, constraints, logic or processes and mustusually be separated from other dissimilar activities or departments, so as tomaximize both their own internal efficiencies and their potential impact on theorganization as a whole. Differentiation involves the recognition and management ofdifferences or uniqueness. Therefore, our framework does not advocate the creationof differences but rather argues that the usual classification of value activities mayresult in dissimilar sub-activities being bundled together and managed as one,indivisible whole. Where this results in the entire activity set being dispersedthroughout the domestic organizations, concentration potential is lost.

The concept promulgated here argues for dividing the value activities into uniquesub-categories and concentrating those amenable to concentration in onegeographical area, while dispersing to the domestic organizations those sub-

activities that must be managed locally. For example, outbound logistics is not ahomogenous, undifferentiated bundle of activities but a package that is divisible intoone sub-activity set, strategic logistics, that can be concentrated as per Figure 4, andanother sub-activity set, operational logistics, that must be dispersed to the domesticunits. Interestingly, the literature identifies high differentiation or heterogeneity as oneof the distinctive characteristics of service businesses. Therefore, the rationale of ourframework has support in the literature and in practice, in that it simply proposesexploiting the innate nature of services but in a way that gives service companiesmore leverage to compete internationally. Despite uniqueness, all differentiated units,departments, functions or activities must be made function as one unit, in the pursuitof corporate strategy and mission. Integration refers to the process and mechanismsof bringing all differentiated units or activities together under the discipline of one

corporate strategy (Lawrence and Lorsch, 1967, Peters and Waterman, 1982;Bossidy and Charan, 2002). All the value chain actions outlined in Figure 4 involveeither differentiation or integration through concentration, standardization andcoordination. While the literature on service businesses has focussed heavily onstandardization as a means of increasing operations strategy effectiveness, the valuechain analysis presented here argues that, at least for corporations that want tocompete internationally, the exploitation of value activity differentiation may prove tobe as powerful a mechanism for leveraging service strategy.


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Figure 4: The Value Chain and the Global Operations Strategy of ServiceBusinesses

FIRM INFRASTRUCTURE

Implications for the xxxxx xx Global xxxxxx Management of Service Businesses

FIRM INRASTRUCTUREStandardize information 2. Standardize information system 3. Automate information generation and

analysis 4. Concentrate Information system development, strategic information generation andanalysis in home base 5. Disperse operational information generation, analysis and reporting tolocal service units or domestic organizations

HUMAN RESOURCE MANAGEMENT1. Standardize human resource policies/practices/training 2. Standardize selection practices

3. Concentrate development of Human Resource policies and procedures 4. Disperse recruitment5. Differentiate between operational and Managerial training 6. Concentrate management trainin

in home base 7. Disperse operational personnel management to domestic/local units

TECHNOLOGY DEVELOPMENT1. Standardize Design of SDS 2. Differentiate between Core Service and Peripheral Service3. Concentrate Technology development of Core Service in home base 4. Disperse design of

peripheral service and its requisite process technology development to relevant domesticorganizations

PROCUREMENT1. Differentiate between strategic procurement (example, Outsourcing, Off-shoring) and

buying 2. Concentrate strategic Procurement in home base 3. Disperse operationalbuying to domestic organization

INBOUNDLOGISTICS

1.Differentiatebetweenstrategiclogistics andoperationallogistics2. Concentratestrategiclogistics inhome base3. Disperseoperationallogistics indomestic units

OPERATIONS

1. Differentiate betweenstrategic and operationaldimensions of operations2. Concentrate strategicoperations (processtechnology choice, sitedesign, strategicoperations systems choice-TQM, for example-development ofoperating practices andprocedures) in homebase3. Disperse day-to- dayoperations (operationaldimensions) to domesticunits 4. Design Service

Delivery System (SDS)first to deliver core service5. Make requisiteadjustments to SDS toexecute peripheralservice, where applicable.

OUTBOUNDLOGISTICS

1.Differentiatebetweenstrategic andoperationallogistics

2. Concentratestrategiclogistics inhome base

3. Disperseoperationallogistics todomestic units

MARKETING &SALES

.1. Differentiatebetween Strategic,Operational-Internal,and Operational-External Marketing2. ConcentrateStrategic Marketing inhome base3. DisperseOperational InternalMarketing to localservice units4. DisperseOperational ExternalMarketing to domesticorganization5. Disperse market

analysis/research ofperipheral service torelevant domesticunits

M ARGIN

M ARGIN

M

ARGIN

M ARGI

N

AFTERSALES

Entirelyend-of-chainactivity:Disperseto localservicedeliveryunits

As globalization deepens and broadens and as domestic markets become morecrowded because of intense local competition, service corporations must increasethe geographic scope of their operations and compete internationally through thedeployment of global operations strategies. The early pioneers in global serviceoperations strategy development are already reaping huge benefits. Walmarts


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operations outside the US are currently generating higher profit margins than itsdomestic operations, while McDonalds now derives more than fifty percent of itsprofit from its foreign units. FEDEX could not be the huge global corporation that it istoday with over 105,000 employees in more than 200 countries if it did not globalizeits operations. In fact, because of the very nature of its service, FEDEX could notgrow to be a significant corporation and offer a full range of courier delivery servicesto its customers, if it did not start to compete internationally. And under the pressureof competition in its domestic US market, Walgreens, the largest US baseddrugstore chain is increasing its international reach by entering the Puerto Ricanmarket. Eventually, Walgreens must follow the lead of Walmart, one of its majorcompetitors, byentering both of the other NAFTA markets, Canada and Mexico.

The moment a service corporation decides to venture outside its home base market,what is commonly referred to as its global platform, then it must search for ways toovercome the innate disadvantages that service firms have when it comes tocompeting globally. The actions that overcome these innate disadvantages, as we

have seen, hinge on differentiation and integration through concentration andcoordination. The case of FEDEX makes the point rather forcefully. When FEDEXentered the rapid courier (overnight delivery) market in 1972, pick-up and deliveryoperations were all organized on the basis of multiple hubs, at least for thecontinental US market. Because the existing entrenched package deliverycompanies were competing on cost, FEDEX could only successfully enter the marketby positioning itself on differentiation. (Porter, 1985). At the time, the market waspoorly served in that the reliability of twenty-four hour delivery was very low. Thisoffered a golden opportunity for the company to differentiate itself on the rapidity andreliability of its overnight delivery service. FEDEX designed and implemented thesingle-hub concept in which all packages to be delivered within the continental UnitedStates, no matter where they originated, were taken to Memphis, the location of the

companys highly automated, single-hub package sorting operation. What isinstructive for our purposes is that the single-hub concept represented a decision toconcentrated key OPERATIONS VALUE-CHAIN sub-activities- package sorting andreloading for eventual delivery, aircraft maintenance and operations scheduling- inone geographical location. Having concentrated these critical operations value chainsub-activities, the company proceeded to leverage these concentrated activities forglobal competitive advantage through the intensive use of automation to reapeconomies of scale, of capacity and of technology.

A service company like FEDEX, however, must have local service delivery units toundertake local pick-up and delivery, and this requires strong coordination of theselocal units with each other and with the concentrated central hub. But, the decisionto concentrate some critical operations value activities at Memphis provides for acentralized unit that greatly facilitates and enhances the effectiveness of suchcoordination. The pressure to globalize meant that the company had to broaden anddeepen its international reach in order to be able to compete globally, and thisrequired the creation of more regional hubs to service the market on a truly globalscale. But, the existence of the Memphis facility both minimizes the number of theserequisite regional hubs to serve the entire global market -FEDEX's global reach is sobroad and deep that we can safely say that the company serves the entire globalmarket- and facilitates coordination of these regional hubs with each other and withthe central facility at Memphis. The regional hubs are but attempts to reap thestrategic benefits of concentration on a regional basis.


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A similar line of reasoning can be used to understand why companies likeMcDonalds that compete in high contact, mass consumer service businesses mustpick competitively critical activities for geographic concentration, and why they mustdesign their services and service delivery systems in ways that enhancecoordination. In the case of MacDonald's, some of the critical activities that wereselected for concentration are Research and Development, Management Training,and Promotional/Advertising Campaign Development. The case of FEDEX has alsoshown us that if concentration is done carefully, at least for service firms, the factorsthat enhance concentration also promote coordination, and this can substantiallymitigate the innate disadvantages that service companies possess for competinginternationally.

More importantly, a service firm can move its potential to compete internationally bydeliberately picking for geographic concentration, particularly in its home-base orglobal platform, value chain activities that, when concentrated, increase the firmscapability to achieve tight coordination of regional/local units that deliver the serviceor perform other value chain activities. In every firm that competes successfully

internationally, there is a deliberate and strategic choice to concentrate theperformance of as many activities as possible in the company's global platform. Although the type and number of activities that can and must be concentrated variesfrom one industry to another and from one company to another, it appears that noservice company can compete internationally if management cannot find ways toconcentrate in its home base or global platform a critical mass of value activities withhigh potential for strategic leverage. For, if a company cannot concentrate enoughvalue activities in its home base, it will have a difficult time achieving cost superiorityrelative to local service providers and will be unable to leverage cost advantage toachieve differentiation parity with already differentiated local companies that basetheir differentiation on their ability to cater to local tastes. The greater the number ofvalue activities that a company can concentrate, the higher the cost advantage from

concentration and the greater the potential for the company to sacrifice some of thatcost advantage, as necessary, to differentiate the service offering by dovetailing it tolocal tastes, at the periphery, while keeping the service core intact.

Moreover, the tight coordination of both geographically concentrated activities andlocally dispersed service delivery units is a competitive necessity. In fact, for servicefirms that compete internationally, their relative strategic positions and competitiveadvantages substantially reflect their relative success at concentrating critical valuechain activities and at designing their services and service delivery systems andoperations to enhance coordination. Thus, deliberate analysis of the service valuechain to uncover hidden potential to concentrate activities, and the constantevaluation of the service offering and service delivery system for the explicit purposeof designing and redesigning them to enhance coordination, are strategically criticalactivities in global service industries.

The above observations have deep ramifications for the attitudes that servicecompanies should adopt vis--vis E-Commerce and ERP systems. E-Commercegives some service companies the potential to serve customers on a global scale butfrom a single geographic location. For example, prior to the advent of E-Commerce,a company that competed in the book retailing market internationally had to haveservice delivery units in every local (micro) market. However, with the advent of E-Commerce, book retailing companies can now concentrate their service deliveryoperations in one or a few geographic areas and serve the international market fromthat home base using an appropriate e-commerce model, la Amazon.com. In thesecases, the diseconomies of outbound logistics are substantially mitigated byoutsourcing that value chain activity to companies that are specialized providers of


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that service and have developed substantial core competency in that area thatenable them to drive costs down. By focusing on the strategically crucial aspects ofthe service delivery system, concentrating it in one or two geographic locations, andoutsourcing outbound logistics, Amazon.com can deploy an efficient global strategyin an industry sector where it was hitherto impossible to do so without deployingservice delivery units (bookstores) in every local market.

The Amazon.com service delivery system also shows the power of standardization,concentration and differentiation in enhancing the global strategy potential of servicebusinesses. The company has completely standardized the core part of servicecreation and delivery system, the hardware, software and system operations thatpermit customers to shop online. We say this because the ultimate level ofstandardization is to have a single process or product/service. It is that level ofstandardization that allows very high levels of concentration of the service deliveryprocess and, concomitantly, the realization of massive economies of scale that reachbroad and deep into the corporation, in general, and the service creation and deliveryprocess, in particular. Moreover, as we have argued, it is that same high level of

standardization and concentration that enhances coordination of the value chainactivities, and this base level of coordination is augmented by the outsourcing of theoutbound logistics value chain activity. What this all boils down to is that the wholeservice apparatus is designed, configured and deployed to build, create and exploitstrategic and operating synergy and symbiosis, and this substantially compensatesfor the innate disadvantages that service business possess.

The same logic applies to service delivery units that provide support service tointernal customers, that is, other organizational sub-units. Among these supportservice units are purchasing, inbound logistics, service unit design, to name a few.The concentration of these support units is greatly enhanced by ERP systems. Inaddition, and as we have argued previously, these systems, technologies or business

models that promote concentration also enhance coordination. For example, acompany like Amazon.com that serves the international market from a fewgeographic locations in North America, Europe and Asia greatly reduces the numberof local service delivery units that it must deploy -from a multitude to only two orthree- and by virtue of this fact, significantly reduces the complexity of thecoordination problem. This concentration decision, coupled with the fact that thecompany has carved out the outbound logistics part of the value chain andoutsourced its performance, means that the company can be an effective, true globalcompetitor in a market where it was hitherto not possible to compete internationally.ERP systems that allow companies to plan and control the local service delivery unitsof an enterprise from a central location significantly increase a companys capabilityto achieve tight, seamless coordination of its international operations. These ERPsystems allow concentration of planning and control and, as a significant by-product,enhance coordination.


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Conclusion

We have argued that because of the generic characteristics of services, servicecompanies have less innate potential than manufacturing to compete internationally

by deploying the full spectrum of global strategies. However, we have shown thatservice companies can greatly enhance their capability to compete internationally byusing the value chain model to analyze their service systems to uncover activitiesthat can be concentrated and subject to tighter coordination, and how suchconcentration and coordination could be effectively achieved. Moreover, we haveshown that actions that increase the level of concentration of value activities alsogreatly enhance coordination, thus allowing a company to further leverage bothconcentration and coordination actions. We have also presented anecdotal evidencethat supports the position that the highly successful international competitors in theservice industries have found ways to increase both concentration and coordination,the Internet and ERP systems being the newest ways to do so. As servicecompanies increase concentration and coordination, they come very close tomimicking the full range of global operations strategies deployed by manufacturingcompanies and the impact on their market positions and strategic effectivenessimprove dramatically. Therefore, actions to enhance concentration and coordinationare bone fide international operations strategy initiatives for a service company.

The pure global strategy potential is innate to manufacturing industries and, at theoutset, management can decide to craft and implement a global strategy or exerciseits other strategic options for competing internationally. However, in general, fewservice industries start with a pure global strategy potential, and it takes managementvision and actions to first deliberately create that potential as a strategic move, andthen to leverage it for competitive advantage. The critical insight is that globalstrategy potential which exists naturally for all manufacturing industries must becreated by management in the case of all or nearly all service industries. And a keyidea advanced and evaluated here is that the creation of such potential to competeglobally requires active management involvement in the reconfiguration of the valueactivities to increase both concentration and coordination.

It is to be expected that the successful creation of a competitive potential where itdoes not exist naturally, as is required of most service businesses that want tocompete internationally, is much more difficult than simply positioning a company toexploit an innate potential, as exists in manufacturing. Consequently, the competitiveand differentiation advantage to be derived from the creation of the potential tocompete internationally must be enormous indeed, and represents the stuff of which

true competitive excellence is made. So, then, service companies that succeed incrafting and deploying global strategies will, by implication, come to be dominant inboth the domestic and international segments of their industries. Of course, whenone service company finds ways to reconfigure their value activities to createpotential to compete globally, their competitors must find ways to create their ownpotential to do likewise, since failure to do so would make it almost impossible for thelatter to successfully compete against their global counterparts.

Some interesting avenues for future research emerge out of the analysis andsynthesis presented here. First is the need to examine a broad sample of servicefirms that have successfully globalized their strategies to evaluate the extent to whichvalue chain configuration/reconfiguration played a central role in that strategic

process. Second, it should prove instructive to compare within particular industriesthe value chain configuration of service companies that have successfully globalized


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their strategies with those companies that are not as yet deploying global strategies.Such comparison will show what role value chain configuration/reconfiguration is thecritical factor that demarcates successful global service companies from theirmultidomestic and even local counterparts. Third, future research should seek toestablish whether some service industries are more susceptible than others to valuechain reconfiguration that creates global strategy potential and what are thedistinctive characteristics of these service industries that give rise to suchsusceptibility. Finally, the identification, analysis and evaluation of the mechanismsdeployed by global service firms to enhance coordination is a research imperative.


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